Tuesday, January 22, 2008

Swiber Holdings Limited, through its subsidiaries, offers integrated offshore engineering, procurement, construction, installation, and commission (EPCIC) services to oil and gas companies. Its services include launching and/or installation of jackets in an offshore production platform at offshore production sites; engineering design and laying of offshore pipelines; Engineering design and mooring of FSOs and FPSOs on the seabed; engineering design, fabrication, and installation of single point mooring buoys; and maintenance, servicing and refurbishment of existing single point mooring buoys and their mooring systems. The company also offers a range of offshore marine engineering services, as well as owns and charters vessels. As of February 28, 2007, it operated a fleet of 13 operating vessels, comprising six tug boats and seven barges. Swiber Holdings Limited has operations primarily in Singapore, Malaysia, and Indonesia, as well as in Thailand, India, China, Australia, the United Kingdom, and the United States. The company was founded in 1996 and is based in Singapore.

Strategy Overview

The fortunes of oil services companies are tied to overall supply and demand issues as well as to prices. Not coincidentally, based on these factors the oil industry has experienced several cycles over the years. Changes in oil prices have different effects on different sectors. For example, while high oil prices benefit upstream exploration and production companies, they hurt down-stream refiners and marketers in the form of higher raw materials costs. Conversely, lower oil prices help refiners and marketers while hurting producers’ earnings. Integrated oil companies realize both sides of oil price fluctuations, but they generally benefit from higher oil prices, as they are usually more leveraged to the upstream. Swiber’s position in the upstream section of the value chain means that it has benefited from the recent surge in global oil prices.

For oil drilling & exploration services companies, the location of their operations is of prime importance. At any given time, some geographic areas might be experiencing a surge in drilling activity, while activity in other areas may be stagnant or declining. Offshore areas that have been leading the resurgence in offshore drilling over the past three years include the Gulf of Mexico, the North Sea, Southeast Asia, and West Africa; drilling contractors are paid more for their work in these areas than elsewhere.

Swiber’s Performance

Swiber’s operations are focused in Indonesia & Malaysia, which have seen a healthy growth in offshore exploration & production operations in recent years. The company has been on a rapid growth trajectory over the last two years, with revenues and net profits following a parabolic upward trajectory.

Accordingly, the stock price has also risen meteorically since its listing, hitting a high of about $3.50 late in 2007. However, the recent dip in the stock markets and bloodletting has seen Swiber’s stock price follow the general market trends and dip accordingly:

Recent Developments

Musicwhiz is a current shareholder of Swiber and has been faithfully keeping up with the company. He has written very detailed and insightful analysis of the company’s strategy going forward so I shall refrain from my own analysis and refer you to his blog.

Valuation

I have done a simple valuation using the abnormal earnings growth (AEG) model, so I have not forecast full balance sheets for this valuation.

The assumptions I have used for the valuation are as follows:

Which gives the following valuation (click for full image):

The valuation of $1.29 is still far below the recent traded price of about $2.20, and this may be because the revenue growth rates I have used, despite being quite aggressive relative to other companies, may be conservative.

In terms of relative multiples analysis:

The price appears to be about 17x FY08E earnings and about 6x book value.

Conclusions

By conventional standards, Swiber is not priced conservatively. The market appears to have assumed massive growth rates in the next few years as oil & gas offshore exploration activity continues to grow to meet global demand for oil and as onshore resources decline. High energy prices also mean strong margins for the exploration services companies and Swiber seems poised for benefit.

I personally would like to wait a while to see if the recent market shock will continue and if Swiber's share price will drop further as i like to have a better margin of safety.